Tax time does not have to be a surprise for the small business owner. There is a way to plan for taxes.
Self-Employment tax is how the Freelancer pays Social Security (12.4%) and Medicare Tax (2.9%). When you are an employee, you and your employer split this cost. But since you are both the employer and the employee, you pay the total amount.
Since this tax is a percentage of your NET income, it is important to document every allowable expense and deduction. If your company needs to buy a large piece of equipment, you can use what is called the Section 179 Deduction for tax purposes and subtract the total cost of the equipment from your income and reduce the amount of tax you need to pay.
Early summer is a good time to look at how your Business Income is trending for the year and calculate self-employment tax. It is important to note that the Federal Tax system is “pay as you go”, meaning the IRS would like for you to pay your tax as you earn your income and not wait until the end of the year. They have been known to assess penalties if payments are not made during the year as income is earned.
Need help with estimated tax payments? We will be happy to help!